Portfolio Update: Aggressive Moves To Start 2017

Here are my trades to start the year:

  • I added to my position in Amaya. Indeed, bad names will stop appearing in bad actor clause negotiations now that both David Baazov and Daniel Sebag are gone. Plus Amaya’s operations are coming out as very strong.
  • I bought back shares in Corridor Resources, as you know. It’s now or never for Corridor to move west and grab assets on the cheap before oil heads substantially higher. I need to go long before reading about the acquisition in a press release.
  • I added to my position in MEG Energy after the company announced a major refinancing plan.
  • I added to my position in Painted Pony Petroleum. The company is still undervalued despite being up 60% since I bought it nine months ago.

I also went long lithium by buying all the junior exploration companies operating in Quebec: Critical Elements, Nemaska Lithium and Natan Resources. I’ll let you know shortly how I narrowed it down to those three companies.

Disclosure: I am long AYA, CDH, CRE, MEG, NMX, NRL, PPY. Not for republication on Seeking Alpha.

Amaya: Why I Sold My Shares

I sold my entire Amaya position for C$20 per share today.

The numbers: We know C$24 per share is the best we can get in the short-term. The deal’s failure will lead to a fall of C$4-5 per share to C$15, the price at which I recently bought.

Selling now ensures me a 30% gain and the possibility of buying back shares at a depressed level should the deal fail. However, I might be leaving money on the table.

Last but not least: the profits can be relocated to other stocks.

Be certain though: I will buy again if the stock hits the C$15 mark.

Not for republication on Seeking Alpha.

Amaya: Water Under The Bridge

[…] the Board concluded that at this time remaining as an independent publicly-traded corporation best positions Amaya to deliver long-term shareholder value. […] Amaya and William Hill have determined that they will no longer pursue the merger.

Amaya Press Release, October 18, 2016

The market saw this as very bad news: Amaya’s stock dropped 10% today. I disagree. The company still has too much debt to consider merging with another company.

Not all is bad: the company plans to grow its 2016 adj. EBITDA and net earnings by 10% and 20%, respectively. Free cash flow and net earnings will grow nicely.

As we can see, adj. net earnings will grow faster than adj. EBITDA as the online casino business pick up steam. Indeed, the online casino business has very high operating margins (upwards of 90%, per a previous conference call). In other words: it greatly affects the bottom line.

Full Q3 2016 results are expected within a month.

Disclosure: I am long AYA. Not for republication on Seeking Alpha.

California Online Poker: Quick Update

The online poker bill passed the legislative committee today. The same thing happened last year: could this year be different?

Progress on the bad actor clause wasn’t clear publicly. Surprisingly, the PokerStars coalition supported the bill, even though it included the clause. We only know from its public statement that the coalition is looking forward on establishing a safe, regulated commercial online poker market.

The bill heads to the full Assembly. Unless every interested parties are behind it, there won’t be any progress beyond that point. Therefore two California tribes still need convincing.

Disclosure: I am long AYA. Not for republication on Seeking Alpha.

US Online Poker & DFS Update

Here is a quick update on the state of the US online poker and DFS market.

  • Tennessee and Mississippi: a bill for regulating DFS has been sent to the governor.
  • Michigan: a bill was introduced in the State Senate for regulating both online poker and casino. DFS regulation is still pending.
  • California: a bill for regulating online poker was introduced in the legislation last February. The PokerStars coalition’s strength has been put to the test following the news of insider trading charges against David Baazov. Recently, the debate to include or not the bad actor clause has regain traction because of these accusations. Indeed, last minute amendment of the bill appear to target previous bad actors of the online poker industry, namely PokerStars.
  • New York: progress has been incremental and very slow.

As we know, Amaya is working to diversify its revenue base. However, online poker is still the bread and butter of Amaya and amounts to 78% of its revenue as of Q4 2015. US online poker growth will be undoubtedly a significant catalyst for the stock.

Disclosure: I am long AYA. Not for republication on Seeking Alpha.

Short-Term Update For My Position In Amaya

Let’s take a look at Amaya a few weeks after a took a position in the stock. This is the perfect example of why you can’t time the market: black swan events.

Indeed, why didn’t I move a day earlier? I bought my stake a day after the CEO’s announcement of a non-binding proposal to buy the company for C$21 per share.

Therefore this position has cost me an extra C$3 per share, almost a 20% premium. Note that I bought half of the total position I want in the company. Let’s use the same net debt figure that I used in my post on January 30 and to estimate current EV/FY 2016 Earnings multiples:

Amaya - EV/FY 2016 Earnings Multiples ($M)

Share price ($/sh)10.012.515.0
Market cap209226153138
Net debt219821982198
Net income331331331
EV/FY 2016 Earnings13.014.616.1

Source: Cadotte Capital Partners

As you can see, at $13 per share today the stock is still fairly priced considering the growth of the company. However, I believe that the stock is held down by the only major headwind that the company is currently facing: the recent ruling ordering the payment of $870M to the State of Kentucky. Some other headwinds will be better mitigated in the short to medium-term, such as:

  • The value of the USD should be stable in the medium-term.
  • The changes made in PokerStars’ VIP Program should be mitigated: there is no other place as popular as PokerStars to play poker online.
  • The explosive growth won’t be present in the short-term but it is compensated with an acceptable share price.

I’ll still wait before buying my other half. Indeed, the company already said it’s gonna be in the high end of its guidance for 2015. Therefore I see no reason in buying the stock today a month before the earnings release, unless the stock goes back under its 50-day moving average.

Disclosure: I am long AYA.

Amaya: Can It Hold The 50-Day Moving Average

As you know, there has been a lot of news lately concerning Amaya. The stock currently is about halfway from the CEO’s non-offer of C$21 per share compared to the lows of last week.

AYA StockCharts.com February 5

Source: StockCharts.com

The question now is can the stock hold the 50-day moving average of C$17.89 per share?

The stock displayed strength on February 2 as it climbed to almost C$18 per share. Should this level hold, the stock might present more upside than downside risks and trade upward with momentum from that point on.

I’ll definitively watch this stock in the coming days, and then make my move.

Disclosure: I am long AYA.

Amaya: The Market Called The Buyout Bluff Today

There was a lot of action today. At first, Amaya skyrocketed to C$19.75 per share at the opening, probably because of shorts covering their position. Thereafter the stock price held the C$18.50 per share mark for most of the day, except at the close: the stock price closed at C$18.00 per share.

AYA StockCharts.com February 1

Source: StockCharts.com

The CEO is playing a dangerous game. Yes the company is undervalued and this ‘offer’ could push some shorts to cover. However, the ‘non-binding intention to propose a bid’ could turn to the CEO’s disadvantage: some shareholders could see this temporary share price boost as a reason to sell the stock and cut their losses before seeing the stock falling again in the future.

Indeed, this non-binding intention to propose an offer does not solve the two main problems now affecting the company:

  • The company owes $870M to the state of Kentucky according to the recent ruling.
  • The strengthening of the USD versus the Euro which will affect its revenues.

Therefore, the fundamentals could always hunt the stock and drag it back to the basement. Make sure to have Amaya on your watch list tomorrow.